Monthly Economic Review

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Monthly Economic Review Economic Research Division İzlem Erdem Chief Economist izlem.erdem@isbank.com.tr Alper Gürler Unit Manager alper.gurler@isbank.com.tr H. Erhan Gül Asst. Manager erhan.

....... 2 Financial Markets.............. Banking Sector........ Concluding Remarks. Graphs....... 7 Tables.....9 Global Economy IMF downgraded the global growth forecasts to 3.% and 3.

1 Monthly Economic Review Economic Research Division İzlem Erdem Chief Economist Alper Gürler Unit Manager H. Erhan Gül Asst. Manager İlker Şahin Economist Gamze Can Economist Ayşim Kalkan Asst. Economist Turkish Economy Financial Markets Banking Sector Concluding Remarks. Graphs Tables Global Economy IMF downgraded the global growth forecasts to 3.% and 3.%, respectively, in the January edition of World Economic Outlook for 19 and. IMF stated that recession in the Turkish economy would be much deeper than expected previously. On the other hand, Institution did not announce growth forecasts for Turkey. Having partially closed since December 22, the US government was temporarily reopened after 3 days. Positive signals came from the trade talks between the US and China in January. The meetings will continue in China during February. At the first meeting of 19, Fed has kept the policy interest rate on hold in the range of %, in line with the expectations. In the meeting statement and Powell s speech after the meeting, it was emphasized that Fed will be patient on the interest rate hikes in the coming period. At its meeting in January, ECB did not change its monetary policy. ECB president Draghi pointed out that the economic activity in the region had a weak course. UK Parliament, which turned down the Brexit agreement, voted to reject a no-deal Brexit in non-binding amendment. Besides, the Parliament approved Brexit amendment on replacing Irish backstop. The Chinese economy grew by.% in 1, the weakest growth in last 2 years. The slowdown in the Chinese economy brings new measures to support the economy. In January, oil prices rose by almost % due to the decline in Saudi Arabia's oil exports to the US and the US sanctions against Venezuela. Turkish Economy Calendar adjusted industrial production decreased by.% yoy in November. Unemployment rate increased 1.3 pts yoy to 11.% in October. Manufacturing PMI, which was realized as.2 in January, pointed out that the slowdown in the sector continued for consecutive months. Foreign trade deficit decreased by 2.% to billion USD in 1. During this period, export volume increased by 7% yoy to 1 billion USD while import volume declined by.% to 223 billion USD. Current account balance gave a surplus of 9 million USD in November. Foreign trade surplus and positive course in net tourism revenues led the improvement in current account balance. -month cumulative current account deficit fell to 33.9 billion USD, the lowest level since March 17. In 1, central government budget deficit expanded by 2. billion TRY to 72. billion TRY. Year-end budget deficit came in line with NEP projections. In January, CPI increased by 1.% on a monthly basis and D-PPI rose by.% in the same period. Thus, annual CPI and D-PPI became.3% and 32.93%, respectively. CBRT kept the one week repo rate (policy rate) at 2%, at its meeting held on January 1.

2 Turkish Economy Industrial production kept contracting in November. Industrial production continued to contract in November, in line with the rebalancing in economic activity. According to the calendar adjusted figures, industrial production decreased by.% in this period, while contraction in production of intermediate goods was 11.9%. In the manufacturing industry, where the production shrank by 7.1% yoy, production decreased in 1 out of 2 sectors. The double-digit contractions in important sectors such as automotive, basic metals and mineral products drew attention. Manufacturing PMI had a flat course in January. In the first month of 19, manufacturing PMI remained flat compared to the previous month at.2. By remaining below threshold for ten consecutive months, data indicates that the weakness in the sector continues. In the sub-groups of the index, the slowdown in new orders continues but the recovery in new export orders is remarkable. Although input prices continued to increase in January, this was the lowest increase in the last months. Production sub-index decreased compared to December to 2., while employment continued to decline in January due to the decline in production. Unemployment rate continued to increase. In October period, unemployment rate posted 1.3 pts annual increase and was realized as 11.%. Although labor force participation increased by 72 thousand people in one-year period, employment rose by only 22 thousand people, which led unemployment rate to rise in this period. The seasonally adjusted unemployment rate, Industrial Production (caj, annual change %) J F M A M J J A S O N D Labor Market Unemployment Rate Labor Force Participation Rate (right axis) Apr-1 Oct-1 Apr-17 Oct-17 Apr-1 Oct-1 2 increasing since March, continued its upward trend and reached 11.%. Although the number of people employed in services and agricultural sectors increased in this period, employment in industrial and construction sectors decreased. Retail sales continued to decrease. Annual contraction in domestic retail sales volume continused in November. According to the calendar adjusted figures at fixed prices, domestic retail sales decreased by.3% in November compared to the same month of the previous year. Non-food expenditures contracted at around % in this period, while food expenditures recorded the slowest annual increase in 1 with 1.%. Retail sales, which are the leading indicator of private consumption expenditures under GDP data, indicate a contraction in economic activity in the fourth quarter. 1 - Domestic Retail Sales (calender adjusted, yoy % change) House prices have downward trend. Home sales, which had declined by 27% yoy in November, posted a moderate recovery and increased by 2.9% in December. In this period, annual decrease at mortgaged home sales declined to 79% from %. In 1, home sales declined by 2.% compared to the previous year. Home sales to foreigners, on the other hand, gained momentum last year. Due to the incentives, home sales to foreigners, which were at around 22 thousand houses in 17, climbed to thousand houses in 1. House price increases in Turkey kept losing momentum in November. The annual increase in the quality-adjusted hedonic house price index dropped to.%, the lowest level in the series announced since. The real decrease in house prices was realized as.3% in November. Due to the tax incentives, the contraction in white goods sales slowed down in the last 2 months of the year. The annual rate of decline, which was % in October, was realized as 1% in December. In 1, domestic sales decreased by 17%. The export figures of the white goods sector, on the other hand, have a positive outlook. Sector s export volume posted an annual increase by % in December and by % in the whole year. Source: Datastream, Markit, Turkstat 2

3 Turkish Economy In 1, budget deficit was in line with NEP projections. In 1, central government budget deficit expanded by 2% compared to 17 and was realized as 72. billion TRY, in parallel with the projections of New Economic Program announced in September. In NEP, budget deficit/ GDP ratios for 1 and 19 were expected to be 1.9% and 1.%, respectively. Analysis of December figures reveals that tax revenues increased less than annual inflation due to slowdown in economic activity and tax cuts. On the expenditures front, on the other hand, noninterest expenditures lost significant momentum. Central G overnm ent Budg et January- Decem ber % 17 1 Chang e Expenditures Interest Expenditures Non-Interest Expenditures Revenues Tax Revenues Other Revenues Budg et Balance Prim ary Balance Foreign trade deficit declined by 2.% in 1. Foreign trade deficit contracted for the seventh month in a row in December. In this period, export volume recorded a limited increase with.2% yoy and became 13.9 billion USD while import volume declined by 2.3% to 1. billion USD. Therefore, foreign trade deficit narrowed by 71.1% yoy to 2.7 billion USD. Import coverage ratio, which climbed to as high as 97% in October 1, fell to 3.% in the last month of 1. In 1 as a whole, trade deficit declined by 2.% yoy and stood at billion USD. In this period, export volume increased by 7% and reached 1 billion USD, the record high level. Import volume fell by.% to 223 billion USD. 3 Foreign Trade (-month cumulative, annual change, %) Exports Imports According to the provisional data announced by the Ministry of Commerce based on New General Trading System, the foreign trade deficit continued to contract on an annual basis in the first month of 19. In this period, exports increased by.3%, while imports decreased by 2.9%. Thusly, foreign trade deficit narrowed by 7.% yoy Current account surplus was in line with expectations. In November current account posted a surplus of 9 million USD, in line with expectations. Thus, current account balance gave a surplus in the fourth consecutive month due to the slowdown in the economic activity. During this period, foreign trade figures and positive course of tourism revenues were effective on current account balance. -month cumulative current account deficit (CAD) fell to 33.9 billion USD, the lowest level since March 17. Besides, -month CAD excluding net energy trade gave a surplus of.7 billion USD as of November. -. CAB November 17 November Net Gold Trade -9.. Net Energy Trade Portfolio investments recorded the best performance since January with a net capital inflow of 1.7 billion USD thanks to the government s eurobond issuance. Besides, non-residents made net purchases of 3 million USD in equity market and 2 million USD in the government domestic debt securities market. Official reserves increased by. billion USD in November, while a net inflow of 99 million USD was recorded in net errors and omissions. CPI inflation was in line with expectations In January, CPI increased in line with market expectations by 1.% on a monthly basis. Domestic PPI (D-PPI), which declined in the last two months of 1, also rose by.% in January. Annual CPI inflation, which reached 2.2% in October and declined to.3% at the end of 1, increased slightly in January to.3%. The downward trend in annual D-PPI inflation, which has started in October, continued in the first month of 19. Annual D-PPI inflation, which completed 1 at 33.%, became 32.93% in January. Prices of all main expenditure groups excluding clothing and footwear and housing increased on a monthly basis in January. Food and non-alcoholic beverages increased by.3% compared to the previous month and contributed 19 bps to the monthly CPI inflation. January ( month cumulative, billion USD) CPI Net Tourism Revenues D-PPI (change %) Monthly Annual Annual Average Source: Turkstat, Datastream, CBRT, Ministry of Trade, Ministry of Treasury and Finance 3

4 Financial Markets Global markets Global markets displayed a positive outlook in the first month of 19. The positive developments in the trade negotiations and the statements of major central banks stating support for economic activity led to increase in the global risk appetite. Accordingly, strong capital inflows to emerging markets were observed in January. In domestic markets, CBRT s decisive stance regarding tight monetary policy supported TRY assets. BIST posted a rapid increase. In line with the improvement in risk perception towards Turkey, BIST index recorded the best January performance since 1997 rising by 1% to,7 compared to the year-end. In this period, domestic stock market, supported especially by the increase in banking sector shares, overperformed other emerging stock markets. Turkey Russia Brazil Colombia Mexico Indonesia Thailand Poland Hungary S. Africa India Malaysia 31/Dec 31/Jan - Y CDS (basis points) bps TR 2- Y Benchm ark Y ield 19.73% 1.39% -13 bps BIST- 91,27,7 1.% U SD/TRY % EU R/TRY % Currency Bas ket* % (*) (. USD/TRY +. EUR/TRY) Stock Market in Emerging Countries (/31/1-1/31/19, change %) Chang e Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-19 Interest rates kept declining. FX Rates USD/TRY EUR/TRY Currency Basket Bond yields, which followed downward trend during the last quarter of 1, kept declining in the first month of 19. With the support of the increase in risk appetite towards Turkey, 2-year benchmark bond yield decreased by 13 bps and closed January at 1.39%. CBRT revised inflation forecasts downwards. CBRT left the policy rate at 2% in line with the expectations at the Monetary Policy Committee meeting held on January 1. Central Bank, stating that the rebalancing trend in economic activity became more evident, predicted current account deficit to recover more. CBRT emphasized that the risks to price stability are continuing and reiterated that additional tightening could be made if necessary. In the first Inflation Report of the year, CBRT revised 19 and end-year inflation forecasts to 1.% and.2%, respectively. CBRT reasoned the downward revision by citing the downward pressure on inflation due to weak demand conditions, slowdown in the underlying trend of inflation and downward revisions in import prices in TRY terms. Speaking in the presentation of the Inflation Report, CBRT President Murat Çetinkaya stated that the tight monetary policy stance will be maintained until a convincing decline in inflation is observed and, if necessary, additional monetary tightening could be made. Volatile course in TRY In the first days of January, TL depreciated sharply in the Asian markets in low volume trade. Turkish lira, which started to appreciate in the following days due to rise in demand for domestic assets, kept strengthening as the possibility of a monetary easing before a permanent improvement in inflation was eliminated until after CBRT s meeting held on January 1. The appreciation of TRY accelerated towards the end of the month thanks to more dovish interest policy expectations from Fed in the coming period. USD/TRY, which tested.3 on January 3, ended the month at.179 by declining 2.7% mom. EUR/TRY declined by 2.3% in this period to Benchmark Bond Yield and CBRT WACOF Benchmark Bond Yield WACOF 1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-19 Source: CBRT, Datastream, Reuters, BIST

5 Banking Sector TRY deposits increased.% on an annual basis. According to the Weekly Bulletin published by the BRSA, as of January 2, deposit volume increased by 19% yoy and became 2,7 billion TRY. Annual rise in TRY deposits lost some momentum compared to the previous weeks and became.%. Indeed, TRY deposits remained in the band of 1,3-1, billion TRY since September. On the other hand, FX deposits in USD terms continued to decline on an annual basis. The fall was.% as of January 2. Annual rise in TRY credit volume decreased to.%. Deterioration in credit market continues in the first month of 19. As of January 2, total credit volume rose by.% yoy, the slowest pace more than two years, to 2,37 billion TRY. The deceleration in TRY loan volume continued to be noteworthy. During this period, TRY loans posted the weakest performance since 9 by rising.% on an annual basis. Volume of FX loans in USD terms, contracting annually since the year-end, declined by 2.% as of January FX adjusted volumes Analysis of FX rate adjusted figures makes the weakness in credit performance more apparent. As of January 2, FX rate adjusted credit volume contracted on an annual basis for the first time since 9, while annual increase in deposit volume declined to 1.9%, the lowest reading since April 1. 1 Deposits and Loans (annual % change) Exchange Rate Adjusted Deposit and Loan Growth (annual, %) TRY Deposits TRY Loans.. Jan-1 Apr-1 Jul-1 Oct-1 Jan-19 Deposits Loans Jan-1 Apr-1 Jul-1 Oct-1 Jan-19 Housing loans declined on annual basis. Loss of momentum in consumer loans, which is the case since August, continued in 19, while consumer credit volume declined by.% yoy as of January 2. In this period, the contraction in vehicle loans was.% despite ongoing tax incentives in the automotive sector. The decline in housing loans gained momentum and became 3.1% in the week of January 2. The annual increase in personal finance loans was 1.7% Upward trend in NPL ratio Consumer Loans (annual % change) Gross non-performing loans kept rising and registered the fastest yearly increase since 9 with.% as of January 2. Gross non-performing loans reached 99 billion TRY in this period. Having followed an upward trend in the recent months and reaching above % for the first time since November, as of January 1, NPL ratio became.% as of January 2. In the same period, NPL ratio for consumer and commercial loans were 3.7% and.1%, respectively. Net foreign currency position Consumer Loans Housing Loans As of January 2, banks on-balance sheet FX position was (-) 3. billion USD, while off-balance sheet FX position was (+) 3.2 billion USD. Hence, banking sector s net FX position was realized as (+) 1. billion USD. 2-2 Net FX Position (USD billion) Source: BRSA Weekly Bulletin

6 Concluding Remarks In the first month of 19, positive developments in trade war, concerns regarding global growth, partial shutdown of federal government in the US, dovish statements from Fed and developments regarding Brexit stood out in global markets. The positive signals came from trade negotiations between the US and Chinese officials in January. Fed did not change interest rates in the first meeting of 19 and adopted a more dovish tone. These two developments supported global markets in January. In addition, the reopening of US government after 3 days increased the global risk appetite. On the other hand, global growth concerns put pressure on markets in an environment where economic activity continued to lose momentum in Euro Area and China. In Europe, developments regarding Brexit are closely monitored. While Brexit agreement was rejected in the UK parliament, the proposal that demanding renegotiate Brexit deal in order to find a solution to the Northern Ireland problem was agreed. In domestic markets, data releases showed that slowdown in economic activity has become more evident. Industrial production contracted by.% yoy in November, while manufacturing PMI pointed out that slowdown in the sector continued in January. Current account balance gave a surplus in the fourth consecutive month due to weak economic outlook. The improvement in the inflation indicators since November due to the rebalancing in economic activity and the relatively stable outlook in Turkish lira has stalled by the rise in food prices in the first month of 19. On the other hand, CBRT revised its inflation forecasts down in the first Inflation Report of the year. CBRT s statements about preserving the current tight monetary stance alleviated concerns regarding inflation outlook. F orecasts 1 19 Growth Current Account Deficit/GDP Inflation (year-end),3 (A) 1. (A) Actual

Turkish Economy- Macroeconomic Indicators 1 Contributions to GDP Growth (% point) - Private Consumption Public Consumption Investment Net Exports Change in Stocks 1 1 1 17 1 1 Q3 GDP Growth: 1.

change) Manufacturing Industry CUR (%, right axis) 2 7 7 7-72 - 7 Jan-17 Jul-17 Jan-1 Jul-1 Jan-19 Confidence Indices Real Sector Confidence Consumer Confidence (right axis) 7 11 72 2 9 9 Jan-17

7 Turkish Economy- Macroeconomic Indicators 1 Contributions to GDP Growth (% point) - Private Consumption Public Consumption Investment Net Exports Change in Stocks Q3 GDP Growth: 1.% Growth 1, GDP GDP (USD billion) GDP Per Capita (USD thousand, right axis) Leading Indicators 1 Industrial Production and Capacity Utilization CA Industrial Production (annual % change) Manufacturing Industry CUR (%, right axis) Jan-17 Jul-17 Jan-1 Jul-1 Jan-19 Confidence Indices Real Sector Confidence Consumer Confidence (right axis) Jan-17 Jul-17 Jan-1 Jul-1 Jan-19 Labor Market 3 Employment Indicators (seasonally adjusted) Labor Force Participation Ratio 9 1 Unemployment Rate (%, right axis) Oct-1 Apr-17 Oct-17 Apr-1 Oct Employment (seasonally adjusted, million persons) Oct-1 Feb-17 Jun-17 Oct-17 Feb-1 Jun-1 Oct-1 Foreign Trade and Current Account Balance Imports Exports - Dec-1 Apr-17 Aug-17 Dec-17 Apr-1 Aug-1 Dec-1 (CA) Calendar adjusted Foreign Trade (annual % change ) Current Account Balance (USD billion) Monthly (right axis) month Cumulative Nov-1 Mar-17 Jul-17 Nov-17 Mar-1 Jul-1 Nov-1 Source: Datastream, CBRT, Turkstat 1 7

Turkish Economy- Macroeconomic Indicators Inflation Monthly Inflation.. D-PPI CPI... 2. 1... -2. -. Jan-17 Jul-17 Jan-1 Jul-1 Jan-19 Annual Inflation 2 D-PPI CPI 3 3 32.93 2 1.

3 1 17 1 19 22 1 1 1 CBRT Survey of Expectations - & 2-month Ahead CPI Inflation Expectations 2-month Ahead -month Ahead 1 17 1 19 1.9. Foreign Exchange and Bond Market 9.. 7.... 3.

8 Turkish Economy- Macroeconomic Indicators Inflation Monthly Inflation.. D-PPI CPI Jan-17 Jul-17 Jan-1 Jul-1 Jan-19 Annual Inflation 2 D-PPI CPI Jan-17 Jul-17 Jan-1 Jul-1 Jan CBRT Survey of Expectations - Annual CPI Inflation Expectations (%, year-end) 1(R):.3 17(R): (R): CBRT Survey of Expectations - & 2-month Ahead CPI Inflation Expectations 2-month Ahead -month Ahead Foreign Exchange and Bond Market Exchange Rates EUR/TRY USD/TRY 2. Jan-17 Jul-17 Jan-1 Jul-1 Jan CBRT WACOF and 2-Y Benchmark Bond Yield CBRT Weighted Average Cost of Funding 2-Y Benchmark Bond Yield Jan-17 Jul-17 Jan-1 Jul-1 Jan Average Compound Yield in Treasury Auctions 1.3 Jan-17 Jul-17 Jan-1 Jul-1 Jan-19 2 Expected Real Yield of TRY GDDIs 2. Jan-17 Jul-17 Jan-1 Jul-1 Jan-19 (R) Realization Source: BİST, Datastream, Reuters, CBRT, Turkstat, Treasury 1

9 Turkish Economy - Macroeconomic Indicators Growth Q1 1-Q2 1-Q3 GDP (USD billion) GDP (TRY billion) 1, 2, 2,339 2,9 3,7 7 1,13 GDP Growth Rate Inflation Nov-1 Dec-1 Jan-19 CPI (annual) Domestic PPI (annual) Seasonally Adjusted Labor Market Figures Aug-1 Sep-1 Oct-1 Unemployment Rate Labor Force Participation Rate FX Rates Nov-1 Dec-1 Jan-19 CPI Based Real Effective Exchange Rate USD/TRY EUR/TRY Currency Basket (.*EUR+.*USD) Foreign Trade Balance (1) (USD billion) Oct-1 Nov-1 Dec-1 Exports Imports Foreign Trade Balance Import Coverage Ratio Balance of Payments (1) (USD billion) Sep-1 Oct-1 Nov-1 Current Account Balance Capital and Financial Accounts Direct Investments (net) Portfolio Investments (net) Other Investments (net) Reserve Assets (net) Net Errors and Omissions Current Account Balance/GDP Budget (2)(3) (TRY billion) Oct-1 Nov-1 Dec-1 Expenditures Interest Expenditures Non-interest Expenditures Revenues Tax Revenues Budget Balance Primary Balance Budget Balance/GDP Central Government Debt Stock (TRY billion) Oct-1 Nov-1 Dec-1 Domestic Debt Stock External Debt Stock Total Debt Stock ,3. 1,.9 1,. (1) -month cumulative (2) Year-to-date cumulative (3) According to Central Government Budget Aralık 17 Source: CBRT, Datastream, Ministry of Finance and Treasury, Reuters, Turkstat 1 9

10 Turkish Economy - Banking Sector Outlook BANKING SECTOR ACCORDING TO BRSA's MONTHLY BULLETIN FIGURES (TRY billion) Jan.1 Dec. Change ( 1 ) TOTAL ASSETS 1,732 1,99 2,37 2,731 3,2 3,3 3,7 1.7 Loans 1,7 1,21 1, 1,73 2,9 2,3 2, TRY Loans ,13 1,131 1,1 1,9 1, Share FX Loans Share Non-performing Loans Non-performing Loan Rate Securities TOTAL LIABILITIES 1,732 1,99 2,37 2,731 3,2 3,3 3,7 1.7 Deposits 9 1,3 1,2 1, 1,711 1,99 2,3 19. TRY Deposits ,3 1,2 9.1 Share FX Deposits Share Securities Issued Payables to Banks Funds from Repo Transactions SHAREHOLDERS' EQUITY Profit (Loss) of the Period RATIOS Loans/GDP Loans/Assets Securities/Assets Deposits/Liabilities Loans/Deposits Capital Adequacy (1) Year-to-date % change Source: BRSA, Turkstat LEGAL NOTICE Our reports are available on our website This report has been prepared by Türkiye İş Bankası A.Ş. economists and analysts by using the information from publicly available sources believed to be reliable, solely for information purposes; and they are not intended to be construed as an offer or solicitation for the purchase or sale of any financial instrument or the provision of an offer to provide investment services. The views, opinions and analyses expressed do not represent the official standing of Türkiye İş Bankası A.Ş. and are personal views and opinions of the analysts and economists who prepare the report. No representation or warranty, express or implied, is made as to the accuracy or completeness of the information contained in this report. All information contained in this report is subject to change without notice, Türkiye İş Bankası A,Ş, accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is copyright-protected. Reproducing, publishing and/or distributing this report in whole or in part is therefore prohibited. All rights reserved. Aralık 17 1

Monthly Economic Review

Monthly Economic Review Economic Research Division İzlem Erdem Chief Economist izlem.erdem@isbank.com.tr Alper Gürler Unit Manager alper.gurler@isbank.com.tr H. Erhan Gül Asst. Manager erhan.gul@isbank.com.tr